In recent months, both the S&P 500 and the Toronto Stock Exchange (TSX) have experienced notable growth, capturing the attention of investors and analysts alike. The S&P 500, representing the largest publicly traded companies in the United States, was up 10.2% for the first three months of the year, marking its best Q1 since 2019.¹ Similarly, the TSX, Canada’s primary stock index, achieved its first record-high close since 2022, signalling a resurgence in Canadian equities.²

Understanding the driving forces behind these indices’ remarkable performance is key for investors seeking to make informed investment decisions.

The S&P 500’s growth is due to strong corporate earnings, supportive monetary policies, and optimism surrounding economic recovery. In contrast, the TSX’s growth has been influenced by resources, industrials, and financials, with the recent rally in commodity prices bolstering the performance of resource-based companies, and the expectations of interest rate cuts providing support to stocks.

So, let’s look at the performance of both indices, examining the sectors driving their growth, the economic conditions shaping their trajectories, and shed some light on the factors driving the recent surge in the S&P 500 and TSX.

Sector Composition of the S&P 500 and TSX

A critical aspect shaping the performance of both the S&P 500 and the TSX lies in their distinct sector compositions.

The S&P 500 boasts a diverse array of sectors, with technology dominating the index, accounting for more than 40% of its composition.³ In contrast, the TSX exhibits a heavier concentration in sectors sensitive to economic fluctuations, such as financials, energy, and materials.⁴

These differences in sector composition play a pivotal role in driving the performance of each index. The S&P 500’s significant exposure to technology has been a boon in recent months, with the tech sector rallying amid heightened investor interest in innovation and digital transformation. Estimates based on LSEG data suggest that the tech element of the S&P 500 is up 20.9% in the first quarter of the year.⁵

Likewise, healthcare components of the S&P 500 have also seen substantial growth, fueled by advancements in medical technology and pharmaceutical innovation. As just one example, the new class of GLP-1 weight loss drugs like Mounjaro, Wegovy, and Zepbound that has taken the pharmaceutical industry (and consumer market) by storm over the last six months could have a global market of more than $105 billion by themselves before the end of this decade.⁶

Conversely, the TSX’s reliance on sectors like financials and energy exposes it to fluctuations in commodity prices and interest rate movements. Recent months have seen a resurgence in commodity prices, fueled by robust demand from key global markets and supply chain disruptions.⁷

In March alone, WTI and Brent crude oil reached four-month highs, and copper reached an 11-month high. In April, gold prices briefly rose above $2,400 per ounce—an all-time high—before easing back to just under that milestone number to mark the yellow metal’s fourth straight week of gains.^{8 9} This uptrend has provided a tailwind for the TSX, boosting the performance of resource-heavy sectors such as energy, materials, and mining.

In essence, the composition of both indices underscores the interplay of market forces and economic trends. Understanding the implications of sector concentration is essential for investors seeking to capitalize on opportunities and mitigate risks in today’s dynamic market environment.

Company Performance and Earnings Outlook

The performance of individual companies is also a factor in driving growth for both the S&P 500 and the TSX.

In the S&P 500, technology giants such as Amazon, Meta, Microsoft, and Nvidia have continued to deliver impressive earnings reports, buoyed by robust demand for their products and services.¹⁰ The resilience of these tech titans has been a major contributing factor to the index’s overall strength, demonstrating the power of tech in driving U.S. market performance.

Meanwhile, in the TSX, as commodity prices have staged a comeback fueled by strong global demand and supply disruptions, resource-based companies like Suncor Energy have helped propel the index by capitalizing on favourable market conditions to deliver solid earnings results.¹¹

Looking ahead, key factors such as inflation, interest rates, and geopolitical tensions will continue to influence investor sentiment and company earnings, shaping the overall direction of the S&P 500 and the TSX in the coming months.

Economic Indicators and Central Bank Policies

Recent economic data has been pivotal in shaping investor sentiment on both sides of the border. In the U.S., a string of positive indicators, including robust job growth and resilient housing market activity, has bolstered confidence in the strength of the economic recovery. Similarly, in Canada, signs of cooling inflation and indications of a soft landing for the economy have reassured investors.

Amidst these developments, the monetary policy decisions of the U.S. Federal Reserve and the Bank of Canada have emerged as key drivers of market dynamics. The Federal Reserve’s commitment to maintaining accommodative monetary policy while closely monitoring inflationary pressures has been met with cautious optimism by investors. Likewise, the Bank of Canada’s decision to hold its key interest rate steady at five percent reflects a delicate balancing act between supporting economic growth and managing inflationary risks.¹²

Looking ahead, while central banks continue to use interest rates as a tool to curb inflation, they have signalled that with inflation trending slowly downward, the possibility exists for interest rate cuts in the latter half of this year.¹³ Lower interest rates may stimulate economic activity and corporate earnings growth, providing a tailwind for equity markets.

On the other hand, any rate cuts may be fairly conservative to start, as policymakers balance stimulating growth with keeping inflation in check.¹⁴ While continued higher interest rates may dampen borrowing activity and consumer spending, they could also signal confidence in the strength of the economy, potentially buoying investor sentiment.

As investors navigate an environment marked by this kind of uncertainty, a keen understanding of how economic indicators and central bank policies play pivotal roles in the performance of both the S&P 500 and the TSX is essential for making informed investment decisions.

Ultimately, while uncertainties persist, the outlook for the S&P 500 and the TSX remains positive, offering investors opportunities for growth and wealth accumulation. As markets continue to evolve, staying disciplined and focused on long-term objectives will be key to success in the journey ahead.

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Evolve’s S&P/TSX 60 Enhanced Yield Fund (ETSX ETF) is designed to provide investors with the performance of the S&P/TSX 60 Index, with the addition of enhanced yield through active covered call strategies on the underlying securities. This Fund invests primarily in the equity constituents of the S&P/TSX 60 Index, while writing covered call options on up to 33% of the portfolio.

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Sources

1. Hur, K., “The S&P 500 just turned in its best first quarter since 2019,” CNN, March 28, 2024; https://www.cnn.com/2024/03/28/investing/premarket-stocks-trading-first-quarter/index.html
2. “TSX posts first record high close since 2022 as investors eye soft economic landing,” The Globe & Mail, March 21, 2024; https://www.theglobeandmail.com/investing/markets/inside-the-market/market-news/article-premarket-us-futures-gain-as-fed-sticks-to-rate-cut-projections-micron/
3. Bary, A., “S&P 500’s True Tech Weighting Tops 40%. Why the Index Is So Hard to Beat,” Barrons, February 17, 2024; https://www.barrons.com/articles/sp-500-tech-magnificent-seven-00c0ab36
4. “TSX posts first record high close since 2022 as investors eye soft economic landing,” The Globe & Mail, March 21, 2024; https://www.theglobeandmail.com/investing/markets/inside-the-market/market-news/article-premarket-us-futures-gain-as-fed-sticks-to-rate-cut-projections-micron/
5. Valetkevitch, C., “US quarterly earnings to feature big growth in tech-related companies,” Reuters, April 11, 2024; https://www.reuters.com/markets/us/us-quarterly-earnings-feature-big-growth-tech-related-companies-2024-04-11/
6. Wingrove, P., “Lilly weight-loss drug Zepbound new US prescriptions surpass Wegovy for first time,” Reuters, March 15, 2024; https://www.reuters.com/business/healthcare-pharmaceuticals/lilly-weight-loss-drug-zepbound-new-us-prescriptions-surpass-wegovy-first-time-2024-03-15/
7. “TSX posts first record high close since 2022 as investors eye soft economic landing,” The Globe & Mail, March 21, 2024; https://www.theglobeandmail.com/investing/markets/inside-the-market/market-news/article-premarket-us-futures-gain-as-fed-sticks-to-rate-cut-projections-micron/
8. Hansen, O., “Commodity weekly: Green shoots seen across key sectors,” Saxo Bank A/S, March 15, 2024; https://www.home.saxo/content/articles/commodities/commodity-weekly—15-march-2024-15032024
9. Anil, A. & Shivaprasad, A., “Gold surges as Middle East tensions spur safe-haven rush,” Reuters, April 12, 2024; https://www.reuters.com/markets/commodities/gold-prices-hit-record-highs-safe-haven-demand-2024-04-12/
10. Liu, E., “What’s Behind the S&P 500’s Spectacular Gains, in 4 Charts,” Barrons, February 24, 2024; https://www.barrons.com/articles/nvidia-stocks-gains-market-e3fa828a
11. “Suncor Energy reports fourth quarter 2023 results,” Suncor Energy, February 21, 2024; https://sustainability-prd-cdn.suncor.com/-/media/project/suncor/files/news-releases/2024/2024-02-21-news-release-earnings-q4-2023-en.pdf
12. “Bank of Canada holds key interest rate at 5%,” Financial Post, April 10, 2024; https://nationalpost.com/news/canada/bank-of-canada-holds-key-interest-rate-at-5
13. Schleich, T. & Lovely, W., “Monthly Fixed Income Monitor,” National Bank of Canada, March 2024; https://www.nbc.ca/content/dam/bnc/taux-analyses/analyse-eco/mensuel/monthly-fixed-income-monitor.pdf

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